Tariffs can limit insurers' ability to adjust prices, reinsurance rates ‘muted’: Gallagher Re

Inflationary pressures vary across the region, leaving most markets to face escalating reinsurance costs and stricter coverage term.

The impact of rising inflation on Asian insurers is a complex and nuanced issue that varies across different lines of insurance business and regional dynamics. While headline inflation, typically measured by the Consumer Price Index (CPI), may be decreasing, it may not be the most accurate metric for assessing the impact of inflation on insurance, Gallagher Re reported.

The choice of the appropriate inflation index depends on the underlying cost drivers for specific lines of business. 

For example, wage, medical, and social inflation may have varying impacts on different insurance lines, such as Property and Liability, Medical and Health Liability, and Casualty claims.

Inflation indices are nuanced across the Asia-Pacific (APAC) region, and cultural and societal factors play a role. For instance, jury awards and legal cost inflation are less problematic in Asia compared to the United States.

Price regulations or tariffs can limit insurers' ability to adjust prices for specific lines or markets. Keen competition between carriers, especially in retail markets, can make it challenging to adjust pricing in line with inflation.

Commercial lines of insurance have seen more favourable rate adjustments, while short-tail retail lines have had more reactionary pricing. Mitigants such as indexation and total-sum insured (TSI) coverage adjustments have reduced the need for explicit pricing adjustments.

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Property insurance is particularly vulnerable to inflation, especially when considering Natural Catastrophe (Nat Cat) damage. Costs of construction materials and labour, linked to indices like the Producer Price Index (PPI), affect loss costs, especially in regions prone to Nat Cat events.

Rising interest rates, driven by central banks combatting inflation, have boosted investment income for insurers. However, currency depreciation and market movements can impact capital volatility.

Insurers in the APAC region have faced escalating reinsurance costs and stricter coverage terms, especially in areas impacted by Nat Cat losses. Rising reinsurance rates, diminished capacity, and restrictive terms have been challenges.

Strategies to navigate these challenges include comprehensive risk management, stress testing against inflation scenarios, adjusting policy design, and exploring both traditional and alternative risk transfer solutions. Insurers have adopted structured reinsurance, multi-year arrangements, and retrospective solutions to manage inflation uncertainty. Indexed property policies and inflation-linked bonds are also options to address the impacts of inflation risk.